There are risks and vulnerabilities for practitioners who cross the line
Looking after your client’s affairs often requires taking on a much more involved role than simply straightforward compliance tasks. Acting as a trusted adviser is likely to influence your client’s strategic business decisions and means they may formally appoint you as a director of their company. Or may ask you to take on a shadow director role.
However, you may also notice your role gradually transforming into areas typical of a company officer, without being officially appointed.
Becoming a director in your client’s business is likely to be onerous and is prohibited for audit clients.
Companies Act 2006 states that a company is required to have at least one director. Whether or not someone is a statutory director is a matter of public record and typically to become a director you would be appointed.
However, it is possible to be a director in law, without being officially nominated. If, based on facts, it is proven that you have assumed the role of a director, wholly or to a degree and irrespective of your intention or belief, you may be deemed a de facto director.
The distinction between an adviser and a de facto director may often be a blurred one, and a thorough analysis of your client relationship is necessary to identify whether your role is still that of a professional accountant and adviser, or you’ve assumed the role of a director.
A recently concluded, 20-year-long case, John Anthony Popely (2) Andrew Popely v (1) Ronald Anthony Popely (2) Cosmos Trust Ltd (3) Casterbridge Properties Ltd (2019), 13 June 2019, brought to light two often-disputed questions:
In Popely and others vs. Popely and others, various family members with interests in multiple family companies in the leisure sector operating in the UK and Cyprus argued over their respective shares of the companies.
The dispute resulted in a claim brought by a younger brother against an older brother (Ronald) relating to three payments totalling over £4m, alleged to have been effected by Ronald, for his own and his family’s benefit, made from a family company Castlebridge Ltd, which was owned 70% / 30% by Ronald’s and his father’s trusts. It was alleged the payments were fraudulent and in breach of the older brother’s fiduciary duty to Castlebridge as a de facto director.
It was clear that Ronald took important decisions in relation to Castlebridge, including:
Based on the facts of this and similar cases, the judges established the following facts relating to the concept of de facto and shadow director:
While the concepts of de facto and shadow director share some common ground based on their influence exercised in the business, they are separate, different in nature and often mutually exclusive.
The liability in the case of a de facto and a shadow director has different bases:
You may not be able to avoid liability for actions deemed to be directorial in nature even if you show in good faith that you thought you were not acting as a director.
The Popely claim ultimately failed due to unreliability of witnesses and deficiencies of evidence. The judge closed the case, concluding:
If you are a shadow or de facto director, you will be responsible for acting in the best interest of the company and/or a wide spectrum of stakeholders, such as shareholders, employees, creditors and authorities, depending on circumstances (in the course of trading, administration, liquidation). This applies particularly if you are the only qualified accountant and hence a professional of sufficient authority and seniority to influence the board.
If you are acting as an accountant and doubts arise whether or not your influence over the client company makes you a de facto director, reputational issues may arise as to why a formal appointment has been avoided.
Sanctions are likely to apply if you are found liable for administrative failings or otherwise unfit for company management. Your ACCA membership is likely to be affected if you are deemed a director and subsequently become disqualified.
A formal appointment – putting in place procedures ensuring you act only on instructions of the board – may help manage the risk if your intention is not to be a shadow director or a de facto director.